UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall 

– UK inflation hits 3.1%, highest in nearly six years

– UK earnings flat – households are still suffering falling real wages

– Stagflation risk as food and drink prices jumped 4.1% in 12 months

– UK house prices fall two-months in a row, down 0.5% in October

– Real stagflation risk now, inflation high and growth slowing

– Savings continue to be eaten by inflation 

It was just two years ago that Mark Carney was writing his fourth letter to the British Chancellor, explaining why the country was in a deflationary slump. Even then households were feeling the pinch, despite what officials reported.

Since then Brits have become increasingly vindicated as inflation figures have begun to show what they have all known for some time – prices and the cost of living is on the rise.

Now Mark Carney is forced to write a different type of letter to the Chancellor, one where he will have to explain why inflation is above target at 3.1%. The jump to over 3% in the year to November is the fastest paced increase seen in nearly six years.

Carney’s dilemma

The Governor of the Bank of England now finds himself in a bit of a quandary.

Usually a central bank would increase interest rates in order to combat inflation. Currently the UK’s stands at the punishingly low 0.5% so one would think that there is plenty of room for manoeuvre.

However, debt levels in the UK are massive – at every strata of society – and increase rate rises will lead to a recession or indeed a depression. There is also the not inconsequential matter of Brexit.

Brexit is now seemingly more important than the spending and saving power of Britain’s households and must be considered when looking at a rate hike. When rates were raised last month (the first time in a decade) it was done with the Bank of England’s acknowledgement that Brexit was likely to hurt the country’s growth prospects. So the MPC erred on the side of caution.

With the Brexit cloud growing ever darker and uncertain, the Committee are aware of the need to keep consumer spending, the engine of the UK economy, pumping along. However, if inflation is not ‘handled’ then too much inflation could threaten the central bank’s grip on the economy. Too much inflation could result in total engine failure.

This is Carney’s dilemma.

No dilemma for households?

For savers, pensioners, businesses and households the situation should really be a no brainer. Household bills for food and non-alcoholic drinks are now up by a punishing 4.1% in the last year.

And that discounts the stealth inflation that is taking place in the UK and internationally in the form of shrinkflation. Shrinkflation in the UK is very real with real inflation much higher than reported and realised as consumer items, especially food, shrink in size while prices remain the same or go higher.

Savers, pensioners and households are likely tearing their hair out as economists rush to point to airfares and computer games as the main causes of increasing inflation figures. This is of little consequence to a household pushed to its limits when it comes to feeding and clothing a family.

A flight to Malaga or the next Grand Theft auto is likely the last things on parents’ minds.

The squeeze is so tight that many households have been forced into credit card spending and other forms of borrowing. This has been ‘manageable’ so far as deals offered by credit companies often mean no payments for a set period, free transfers and interest rates make little difference to borrowing costs.

The primary way to combat inflation is to hike interest rates. This will be good if it brings down household debt in the long term but painful as it will push up the cost of debt in the short and likely medium term.

UK household debt stands at £1,630.1 billion (£1.63 Trillion)

Currently UK household debt stands at £1,630.1 billion, an increase of 19% in the last five years.

Sadly the latest measure does not include the rise in fuel prices. This is something else households and businesses are feeling the pinch in and must feel frustrated that it is so rarely acknowledged by those deciding the fate of finances.

The RAC have today warned that tha